First Trust Deeds as an Investment - Viable as a New REI?

Question

Hi Everyone,

I'm new to BiggerPockets with my main financial experience coming from investing in the stock market over the last few years, however, I want to expand into real estate investments. I am planning on investing in First Trust Deeds through a company I was introduced to but I would like to do proper due diligence (what should I watch out for) and understand why a borrower would pay 7-9% through deeds investments. I appreciate your thoughts on this type of cash flow investment.

Thanks-

Bob Malecki · Answer

@Gary Wong The book Paper Profits is an excellent starter: https://www.amazon.com/Paper-Profits-Beginners-essentials-mortgage-ebook/dp/B06Y4C7X6Y/

Andy Mirza · Answer

@Gary Wong In addition to reading books on notes, I highly suggest that you just dive in and read the past threads in this forum. When I got started in notes several years ago, I went through the last year of posts in this forum and read whichever ones caught my attention. Most basic questions have been asked and answered several times over.

Jamie Bateman · Answer

Hi @Gary Wong, a borrower might pay 7-9% due to: less-than-ideal credit, wanting the funds quickly, a lack of equity in the property, not wanting to go through the gauntlet of getting approved for bank financing, etc. A few things to consider:

• Are these owner-occupied properties?
• Are the loans amortized or interest-only?
• What states are you looking at?
• You should consider running your own BPO/appraisal on the property.
• Will there be a lender's title policy issued?
• Will the closing occur through an escrow company or attorney's office? 
• Who will service the loan?
• What is the history of the company you referred to (likely a broker) and the borrower?
• Are you on your own if the borrower stops paying, or will the broker step in to help?

Brett Burky · Answer

I second the Paper Profits book. It's got some great case studies in it that really break down the process. @Joshua Andrews did an amazing job with making it easy for a layman to understand.

Gary Wong · Answer

Thanks, everyone. I just read Paper Profits and it's very insightful. I'll do a search on the old posts and see what else I can glean regarding note investing.

Jamie Bateman · Answer

@Gary Wong, I am guessing these are loans to investors/landlords? If so, the borrower's credit score matters less (in my mind) than does their track record and the track record of the broker.

The location can greatly affect the speed and costs associated with any potential foreclosure/eviction actions, although right now many of those legal filings have come to a halt across the country. Location matters for many other reasons as well, though (average rent, market trends, etc.).

Probably the best thing for you to do, along with continuing to educate yourself, is to talk to others who have used this company before. Which company is it?

Gary Wong · Answer

Hi @Andy Mirza,

I believe they are the originator that brokers the deal. They are educating me by providing me assurances on the viability of the investment and details on each borrower, however, I'll ask for education in general - sometimes it's hard to ask the right question if you don't know what to ask so I decided to come onto this board to get more education.

If there is a place to get more info, please PM or send - I am planning to read William Mancrow, the Paper Source which I heard has some good things to get educated.

Sincerely,

Gary

Andy Mirza · Answer

@Gary Wong Is the company that you're looking at an originator that just brokers the deal? Or is it a fund that gets the capital from investors and runs the business?

You're doing the right thing by educating yourself but there's a lot to learn before making that first investment and this company should have already helped answer these questions for you, in my opinion. How are they helping to educate you? Do they provide referrals?

Yes, foreclosure laws are state specific and vary widely.

Yes, always get a lender's policy. Not only does it protect you (or should) but it'll make it easier to sell the loan if you need to.

Gary Wong · Answer

Hi @Jamie Bateman,

Thanks for the response! That does make sense of why a borrower would pay more than getting a loan at a bank.

Regarding a few things to consider, can you provide clarifications of the following?

• - Owner Occupied vs Investor Properties: Assuming the risk is lower for owner-occupied (in general) but it depends
• - States would impact foreclosure and non-payment, correct?
• - Would you recommend lender's title policy or it depends?
• - Whether it's closed at an escrow company or attorney office - I think my case it would be an escrow office, is there Pro/Cons to each or would you recommend an attorney look over the paperwork?
• - Lastly, I noticed you didn't mention credit score but you did say history of the borrower. Credit Score matters less in this case?

Thanks for your time.

-Gary

First Trust Deeds as an Investment - Viable as a New REI?

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